Lei Zhu: Tech Giants Extending Server Depreciation Period: “Paper Wealth” or Real Technological Dividend? | Insight

Release time：2025-11-27    

[Recently we have seen an interesting phenomenon: many tech giants engaged in the AI trend, such as Microsoft, Google and Amazon, have extended the depreciation periods for their data center assets, including servers. What exactly is going on here? What does this mean for understanding the financial reports of these companies?

Lei Zhu

Professor in Accounting at FISF

Mainly studying theoretical and empirical corporate finance, mergers and acquisitions, research on legal and regulatory systems related to financial markets and stock market efficiency, etc.

In simple terms, it’s like buying a car. Originally, you planned to drive it for five years and then scrap it, so you recorded a depreciation of one fifth of its value each year. But later, you found that the car was of excellent quality, and with proper maintenance, you decided to drive it for eight years. As a result, you switched to recording only one eighth of the depreciation each year. By doing this, the “expense” on your books decreased annually, making you appear wealthier.

This is what tech companies are doing right now. In accounting, this practice has a formal name, “Change in Accounting Estimate”.

14. What’s happening behind the scenes?—The “two sides of the same coin” of motivation

Why would companies make such adjustments at this time point? Typically, it is driven by two forces that may coexist at the same time:

01

Rational business and technological logic (The Formal View)

Firstly, we can’t simply assume it as pure financial engineering. Behind such changes there might exist solid business and technological support:

More durable hardware: With technology iterating and upgraded, the architectural design, cooling technologies, and the reliability and durability of server components have definitely improved, extending both their physical lifespan and their economic useful life.

“Tiered usage model” of assets: A company building a hybrid computing architecture may allocate the most demanding frontline tasks of AI model training and inference to its latest server clusters, while turn older servers that have been phased out to workloads with lower computational requirements, such as data analytics, internal testing or storage backup. Through such granular management, the overall utilization rate of assets is enhanced, and their service lifecycle is effectively extended.

02

“Accounting magic” under realistic pressure (The Informal View)

High-cost AI arms race: In order to maintain leadership in the AI domain, companies must invest heavily (i.e. incur substantial capital expenditures, or CapEx) to purchase thousands of expensive AI servers.

The depreciation bomb that erodes profits: These massive investments require substantial cash outlays at the time of purchase (impacting the cash flow). However, they are not fully expensed immediately. Instead, their cost is allocated over several years through “depreciation”, gradually eroding reported profits on the income statement over time.

The impulse to “optimize” financial statements: If the depreciation period is short, the annual depreciation expense will be significantly high, and the net profit reported in financial statements will be severely reduced, presenting unfavorable figures that may potentially undermine stock price and market confidence. By extending the accounting useful life from (for example) 4 to 6 years, the annual depreciation expense can be cut down sharply, thereby making the profit in the current period appear “better” on paper. In the field of finance, this is often viewed as a form of “Earnings Management”, which is adopted for the purpose of meeting short-term expectations of the capital markets.

14. How to see through the truth?

- the “revealing mirror” of the discrepancy between the profit and the cash flow

As investors or analysts, our core mission is to discern whether the change is for “accounting purposes” or a genuine reflection of changes in the underlying business reality.

The key point here is to understand the fundamental difference between the pair of core concepts, “Accounting Profit” and “Operating Cash Flow”.

Accounting Profit: Based on the accrual accounting principle, it incorporates numerous management “judgments” and “estimates”. The depreciation period, for instance, is one such estimate. It tells you how much money a company has earned “on the books”.

Operating Cash Flow: Based on the cash accounting principle, it records the actual cash received and paid out from the business operations of a company. It is closer to the “fact” that tells you how much money has actually moved in and out of the company’s “pocket”. Extending the depreciation period only alters the non-cash item of “depreciation”, magically boosting accounting profit while unable to change the cash flow. The cash for purchasing servers has flowed out the moment it was paid.

In consequence, a savvy investor would never be complacent with the figures on the income statement alone. Instead, they would immediately employ the X-ray machine of “integrated three-statement analysis” and proceed with the following operations:

Go to the Footnotes: Any significant change in accounting estimates and its impact on the financial statements must be disclosed in detail within the notes to the financial statements. This is the best source for obtaining first-hand information, as companies are required to explain the rationale behind the change and quantify its effects here.

Follow the Money: Compare the income statement with the cash flow statement. If a company sees substantial growth in profit with no corresponding improvement to the operating cash flow, or even with deterioration, this is a red flag. Particular attention should be paid to Free Cash Flow (roughly equaling the operating cash flow minus capital expenditure), which measures the money a company truly has at its discretion after maintaining operations and reinvesting. This is the ultimate source of value.

Be a Detective: Apply critical thinking to the reasons given by the management for the change. Ask yourself: Does their stated technological progress or change in usage patterns align with the overall industry trend? Are their peers doing the same? Are these reasons substantively credible?

14. Summary

In summary, tech companies extending the depreciation period for servers is a classic financial event with “two sides of the same coin”. It could be a genuine reflection of technological iteration and efficient asset management, or it could also be a financial strategy to beautify short-term profits under the immense pressure of AI investments. It perfectly illustrates why we must never view any single number in financial statements in isolation.

A sophisticated investor must possess the capability to see through the mist of accounting profit and discern the underlying cash flow of reality and business motivations. The next time you see a company’s profits surge, you might start by asking this question: “Where’s the cash?”